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Government To Form Working Group To Resolve Angel Tax Issue For Startups

The government said it will form a working group to suggest changes in taxing the angel funds received by startups, two weeks after it issued a notification that attempted to assuage their worries over raising such investments.

The committee will come out with a solution in four-five days, Ramesh Abhishek, secretary at the Department for Promotion of Industry and Internal Trade, told reporters after a meeting with startups and angel investors on Monday.

The working group will comprise startup founders, members from angel investing community, along with officials from the Central Board of Direct Taxes and Department for Promotion of Industry and Internal Trade, Sreejith Moolayil, co-founder of health food startup True Elements, who was present at the meeting, told BloombergQuint over the phone.

The meeting comes against the backdrop of various startups raising concerns over certain provisions in the government’s notifications such as tax exemption would apply to only those entities which raise less than Rs 10 crore in share capital, among others.

Nikunj Bubna, founder of What’s Next—one of the startups that received a tax notice earlier—said he suggested scrapping of Section 56(2) of the Income Tax Act or excluding startups registered with the Department of Industrial Policy and Promotion, now Department for Promotion of Industry and Internal Trade, from the purview of the section.

According to Section 56(2) of the Income Tax Act, any excess amount received by a company is treated as its income if it issues shares to a resident at a price which exceeds the fair market value of the shares.

Startups have also sought to increase the number of years of incorporation of a firm from seven to 10 years to qualify as a startup, Bubna said. He suggested the entities that have received notices should get immediate respite as investors don’t prefer funding such ventures.

The tax department has asked its officers to not recover tax on cases where assessment orders have already been passed on angel tax, said Akhilesh Ranjan, member of CBDT, who was also present at the meeting.